Master Fab Inc. is considering an investment in equipment that will replace dire
ID: 2497093 • Letter: M
Question
Master Fab Inc. is considering an investment in equipment that will replace direct labor. The equipment has a cost of $115,000 with a $10,000 residual value and a five-year life. The equipment will replace one employee who has an average wage of $42,755 per year. In addition, the equipment will have operating and energy costs of $11,130 per year.
Determine the average rate of return on the equipment, giving effect to straight-line depreciation on the investment. If required, round to the nearest whole percent
Explanation / Answer
Cost of Equipment 115,000.00 Residual Value 10,000.00 Life in Years 5.00 Depreciation = (115,000-10,000)/5 21,000.00 Average Investment = (115,000+10,000)/2 62,500.00 Savings of Employee Costs 42,755.00 Operating and Energy Costs 11,130.00 Depreciation 21,000.00 Net Savings 10,625.00 ARR= Average Return during period/Avg Investment ARR= 10,625/62,500 ARR= 17%